Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 365: The Interaction Between Fiscal and Monetary Policies: Evidence from Sweden

Sebastian Ankargren () and Hovick Shahnazarian
Additional contact information
Sebastian Ankargren: Uppsala University, Postal: Department of Statistics, P.O. 256, 751 05 Uppsala, Sweden
Hovick Shahnazarian: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: This paper estimates the interaction between monetary- and fiscal policy using a structural VAR model with time-varying parameters. For demand and supply shocks, the two policies are estimated to be complementary, while for monetary and fiscal policies shocks the two policies act as substitutes. The budget elasticity varies between 0.3–0.6, indicating that an economic downturn can get a non-negligible negative impact on public finances. The fiscal multiplier is estimated to be stable and higher than one suggesting that fiscal policy can be used to support monetary policy to stabilize the economy in case monetary policy is constrained by the lower effective bound.

Keywords: Fiscal policy; monetary policy; time-varying parameter structural VAR; zero and sign restrictions; Bayesian estimation

JEL-codes: C11; C32; E52; E62; E63

56 pages, First version: February 1, 2019. Revised: April 1, 2019.

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